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Blazing A New Trail With Bank Acquisitions

How GFA FCU overcame numerous challenges to take advantage of the right growth opportunity.

The Greek Temple of Apollo at Delphi dates back as far as the seventh century B.C. Yet the importance of its famous maxim “know thyself,” which was found inscribed on the ancient site’s walls, still rings true in today’s increasingly complex world.

Credit unions have little room for missteps, so before an institution can assess its ability to undertake a large-scale project such as a merger or acquisition, it must fully understand its own strengths and weaknesses as well as how those factors shape its opportunities.

GFA Federal Credit Union ($421M, Gardner, MA) has a 75-year history of successful adaptation. Late last year, the credit union became the second credit union in history to acquire a bank when it obtained the sole brick-and-mortar branch of Monadnock Community Bank as well as its roughly 4,000 bank customers, employees, loans, technology, and other assets and liabilities.

Although the credit union has acquired a half-dozen other institutions throughout its history, it has been able to also achieve organic growth. And when it considers a merger, it looks at several variables; balance sheet growth is not the singular driver of its acquisition activity.

“We haven’t been aggressive as far as our previous acquisitions,” says CEO Tina Sbrega. “Each of these credit unions were smaller, primarily SEG institutions who came to us out of a desire to expand the products, services, and benefits available for their members.”

Expanded Horizons

Once almost exclusively focused on Gardner’s French Canadian population, many of whom had migrated south seeking employment in the region’s booming furniture industry, GFA began expanding its reach to the larger Massachusetts community starting in the 1980s.

Moving into the 2000s, an expanding lineup of products and services coupled with an expanding branch presence and the arrival of a full service insurance agency CUSO further solidified GFA as a community pillar.

The Gardner region is home to 20,000 individuals and more than nine financial institutions. Yet according to GFA, the credit union has managed to capture more than 28% deposit market share in this portion of its footprint. Success on its home turf means GFA can afford to look for more than just the chance to grow its portfolio in an acquisition — it can also grow its footprint.

“Right now, we are looking to replicate the success we’ve had in Gardner in some of our outlying markets,” Sbrega says.

Eight years ago, the credit union built its first out-of-state branch in Rindge, NH. The location proved to be an underbanked community with a natural affinity toward cooperative values.

“Within our first four years we had $20 million in deposits from Rindge,” Sbrega says. “That success came easily.”

Nearby Peterborough, NH, posed a similar opportunity but had a lack of options in terms of credit union acquisitions. In 2011, a small community bank with eroding capital that was operating under a letter of understanding order from regulators began accepting bids for a buy out.

This bank, Monadnock Community, was initially chartered as a credit union but converted to a mutual bank and then to a stock-owned banked.

“It had established community involvement and was a true, local financial institution,” Sbrega says. “I saw a tremendous amount of synergy between our two organizations.”

Monadnock Community also had the same core technology provider as GFA and offered a number of business lines — including a complementary real estate and commercial portfolio — that GFA could more effectively acquire than build from scratch.

Bureaucracy And Best Interests

All acquisitions have moving pieces to manage, but this acquisition required gaining approval from six regulatory bodies and individuals: the NCUA, the Massachusetts Share Insurance Corporation, The Massachusetts Commissioner of Banks, the FDIC, the OCC, and the bank’s shareholders. This kind of approval was a significant barrier to a timely project completion. But GFA wasn’t interested in rushing into this acquisition.

“We didn’t want to put GFA at risk,” Sbrega says. “So we needed to fully evaluate the level of its troubles and identify what we would be able to do to turn around those issues.”

GFA hired the attorney that helped United Federal Credit Union ($1.56B, St. Joseph, MI) in its acquisition of Griffith Savings Bank. It also sought the services of a strong investment banker and an accounting firm to handle due diligence and the credit mark on the portfolio. Internally, members of the senior management team worked to communicate expectations regarding individual and departmental responsibilities during this process.

Because it is a credit union, GFA could only bid on Monadnock Community’s price per share using cash. Other bidders had both cash and stock options at their disposal. This put GFA at a significant disadvantage, but the credit union found ways to adapt.

“We knew if we built a branch outright in Peterborough, it could easily be five years before we reached a break-even point, so we factored those expenses into our valuation,” Sbrega says. “Once we arrived at that final pricing, we didn’t go up any higher or the transaction would no longer make sense for us.”

Working closely with NCUA, GFA negotiated temporary exceptions for impermissible assets — including commercial loans with final maturities greater than 15 years — that the credit union normally couldn’t touch and would otherwise have had to sell immediately at a loss.

“At this point, we have less than a half dozen of these nonconforming loans we are still working through,” Sbrega says.

The credit union also worked closely with the bank’s legal representation and all regulators to find solutions to the disposition of the bank’s TARP funds and stock so that the credit union would never take possession of either.

GFA was not the highest bidder, but its $6.4 million offer as well as its culture and community focus convinced Monadnock Community it had found an appropriate institution for its customers and employees.

Despite proactive preparation, the two financial institutions had to push back the project deadline several times. Initial acquisition discussions began in late 2011, but it was not finalized until year-end 2012.

“Ultimately, it was more important for us to be detail-oriented, understand the steps, and have clear lines of communication with the regulators,” Sbrega says.

Such perseverance illustrates that despite the challenge out-of-state or banking markets pose, the payoff from such growth opportunities are unlimited.